Note J – Employee Benefit Plans

During 2003, shareholders approved the City Holding Company 2003 Incentive Plan (“the Plan”). Employees, directors and individuals who provide service to the Company (collectively, “Plan Participants”) are eligible to participate in the Plan. Pursuant to terms of the Plan, the Compensation Committee of the Board of Directors, or its delegate, may, from time-to-time, grant stock options, stock appreciation rights (“SARs”), or stock awards to Plan Participants. A maximum of 1,000,000 shares of the Company’s common stock may be issued upon the exercise of stock options, SARs and stock awards, but no more than 350,000 shares of common stock may be issued as stock awards. These limitations may be adjusted in the event of a change in the number of outstanding shares of common stock by reason of a stock dividend, stock split or other similar event. Specific terms of options and SARs awarded, including vesting periods, exercise prices (stock price at date of grant) and expiration dates are determined at the date of grant and are evidenced by agreements between the Company and the awardee. The exercise price of the option grants equals the market price of the Company’s stock on the date of grant. All incentive stock options and SARs will be exercisable up to ten years from the date granted and all options and SARs are exercisable for the period specified in the individual agreement.

Each award from the Plan is evidenced by an award agreement that specifies the option price, the duration of the option, the number of shares to which the option pertains, and such other provisions as the Compensation Committee, or its delegate, determines. The option price for each grant is equal to the fair market value of a share of the Company’s common stock on the date of the grant. Options granted expire at such time as the Compensation Committee, or its delegate, determines at the date of the grant and in no event does the exercise period exceed a maximum of ten years. Upon a change-in-control of the Company, as defined in the Plan, all outstanding options and awards shall immediately vest.

Stock Options

A summary of the Company’s stock option activity and related information is presented below for the nine months ended September 30, 2012 and 2011:


	2012			2011
	Options		Weighted-Average Exercise Price	Options		Weighted-Average Exercise Price

Outstanding at January 1	293,817	$	33.95	287,393	$	33.64
Granted	16,876		35.39	16,000		35.09
Exercised	(18,899)		28.78	(6,576)		25.54
Forfeited	(1,500)		34.73	-		-
Outstanding at September 30	290,294	$	34.37	296,817	$	33.90

Additional information regarding stock options outstanding and exercisable at September 30, 2012, is provided in the following table:


Ranges of Exercise Prices	No. of Options Outstanding		Weighted-Average Exercise Price	Weighted-Average Remaining Contractual Life (Months)		Aggregate Intrinsic Value (in thousands)	No. of Options Currently Exercisable		Weighted-Average Exercise Price of Options Currently Exercisable	Weighted-Average Remaining Contractual Life (Months)		Aggregate Intrinsic Value of Options Currently Exercisable (in thousands)
$26.62 - $33.90	165,918	$	31.87	43	$	659	114,584	$	32.65	26	$	366
$35.09 - $40.88	124,376		37.70	65		20	69,000		38.11	46		-
	290,294				$	679	183,584				$	366

Proceeds from stock option exercises were $0.5 million and $0.3 million during the nine months ended September 30, 2012 and 2011, respectively. Shares issued in connection with stock option exercises are issued from available treasury shares. If no treasury shares are available, new shares are issued from available authorized shares. During the nine months ended September 30, 2012 and 2011 all shares issued in connection with stock option exercises and restricted stock awards were issued from available treasury stock.

The total intrinsic value of stock options exercised was $0.1 million and less than $0.1 million during the nine months ended September 30, 2012 and 2011, respectively.

Stock-based compensation expense was approximately $0.2 million for both the nine months ended September 30, 2012 and 2011. Unrecognized stock-based compensation expense related to stock options approximated $0.5 million at September 30, 2012. At such date, the weighted-average period over which this unrecognized expense was expected to be recognized was 1.6 years.

The fair value of the options is estimated at the date of grant using a Black-Scholes option-pricing model. The following weighted average assumptions were used to estimate the fair value of options granted during the nine months ended September 30, 2012 and 2011:


	2012	2011

Risk-free interest rate	2.51%	3.07%
Expected dividend yield	3.90%	3.88%
Volatility factor	48.40%	41.12%
Expected life of option	5.0 years	8.0 years

Restricted Shares

The Company records compensation expense with respect to restricted shares in an amount equal to the fair value of the common stock covered by each award on the date of grant. The restricted shares awarded become fully vested after various periods of continued employment from the respective dates of grant. The Company is entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted shares when the restrictions are released and the shares are issued. Compensation is being charged to expense over the respective vesting periods.

Restricted shares are forfeited if officers and employees terminate prior to the lapsing of restrictions. The Company records forfeitures of restricted stock as treasury share repurchases and any compensation cost previously recognized is reversed in the period of forfeiture. Recipients of restricted shares do not pay any cash consideration to the Company for the shares, have the right to vote all shares subject to such grant and receive all dividends with respect to such shares, whether or not the shares have vested. Stock-based compensation expense related to restricted shares was approximately $0.5 million and $0.4 million for the nine months ended September 30, 2012 and 2011, respectively. Unrecognized stock-based compensation expense related to non-vested restricted shares was $2.4 million at September 30, 2012. At September 30, 2012, this unrecognized expense is expected to be recognized over 4.6 years based on the weighted average-life of the restricted shares.

A summary of the Company’s restricted shares activity and related information is presented below for the nine months ended September 30, 2012 and 2011:


	2012			2011
	Restricted Awards		Average Market Price at Grant	Restricted Awards		Average Market Price at Grant

Outstanding at January 1	108,209			96,060
Granted	23,336	$	34.94	14,050	$	35.07
Forfeited/Vested	(13,234)			(1,651)
Outstanding at September 30	118,311			108,459

Benefit Plans

The Company provides retirement benefits to its employees through the City Holding Company 401(k) Plan and Trust (“the 401(k) Plan”), which is intended to be compliant with Employee Retirement Income Security Act (ERISA) section 404(c). The Company’s total expense associated with the retirement benefit plan approximated $0.5 million for both the nine months ended September 30, 2012 and 2011.

The Company also maintains a defined benefit pension plan (“the Defined Benefit Plan”). The Defined Benefit Plan was frozen in 1999 subsequent to the Company’s acquisition of the plan sponsor. The Defined Benefit Plan maintains a December 31 year-end for purposes of computing its benefit obligations. The Company made contributions of approximately $0.6 million and $0.3 million to the Defined Benefit Plan during the nine months ended September 30, 2012 and 2011, respectively.

The following table presents the components of the net periodic pension cost of the Defined Benefit Plan:


		Three months ended				Nine months ended
		September 30				September 30
(In thousands)		2012		2011		2012		2011

Components of net periodic cost:
Interest cost	$	158	$	162	$	476	$	487
Expected return on plan assets		(203)		(203)		(607)		(609)
Net amortization and deferral		174		137		522		410
Net Periodic Pension Cost	$	129	$	96	$	391	$	288